Apple fights off ebook suit with anti-Amazon defence

Apple is a liberator, not an oppressor – that’s according to Apple, at least. The Mac-maker turned device-and-content shop has dismissed the US government’s decision to prosecute on the grounds that it rigged ebook prices by claiming the iBookstore has freed consumers and publishers from the tyranny of Amazon.

According to Apple:

The DOJ’s accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from ebooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

The US Department of Justice (DoJ) says Apple fixed ebook prices with five publishers, driving up prices. The department further alleges that Apple then pushed that price on to Amazon. The DoJ alleged that under the 2010 Apple Agency Agreement, newly released ebooks were all released at a set price that ranged between $12.99 and $14.99 – instead of the $9.99 that had been charged by Amazon. However, the department has not yet uncovered any kind of e-trail or paper trail that proves such a deal was inked.

Three publishers, HarperCollins, Hachette and Simon & Shuster settled with the DoJ on the morning the suit was filed, tearing up the agreement with Apple. Hachette and HarperCollins have also reached financial settlements of $52m with 15 US states and the Commonwealth of Puerto Rico, which all filed legal action in the state of Texas.

Penguin Group and Macmillan, along with Apple, are still fighting.

Apple is no stranger to fielding legal hardballs – just look at its enthusiastic participation in the smartphone and tablets patent mudfight – and its heavy-handedness over trifling cases such as using Steve Jobs’ image or celebs making fun of its ads. Its decision to fight was never in doubt.

But will Apple prevail this time and what's at stake here?

The DoJ is prosecuting Apple under section one of the US Sherman Act, a piece of law that regulates restraint of trade and that can see corporate felons fined up to $10m by the government. It was the law the DoJ used to sue Microsoft over bundling of Windows and Internet Explorer in the 1990s. In its response, Apple zeroed in on the antitrust aspect while plenty of commentators asked why the Feds had decided to prosecute Apple when it was Amazon that held the market.

Circumstantially, things look promising for Apple. Amazon's dominant market share of ebooks has fallen since Apple and the publishers signed the Apple Agency Agreement in January 2010. Amazon was reported to have had 90 per cent of ebooks in 2009 but that's now fallen to 60 per cent. Barnes & Nobel's share is between 25 and 30 per cent now, with Apple grabbing the rest.

The DoJ also has a mixed history on taking on tech companies: IBM, Microsoft and AT&T are the milestones. The government filed against IBM in 1969, saying the mainframe-maker was abusing its dominant market position but dropped proceedings 12 years later arguing the case was “without merit".

The Microsoft case reached a dramatic climax when the ruling judge ordered the world’s largest software company to break itself up. But that never came to pass, as the DoJ lost on appeal and case was shunted into the sidings of some rather meaningless oversight. The entire time the case was taking place, Microsoft continued to build new versions of Windows and IE.

Only on A&T has the DoJ made a mark: AT&T's domestic local business was broken up following a settlement that lead to the creation in 1984 of regional phone companies – the baby Bells. But market forces have since undermined the case, as the Bells re-constituted the company in the 1990s and 2000s to either rejoin AT&T or create America’s largest wireless company, Verizon.

Just the facts, ma'am

Based on its statement, Apple will likely adopt a defence that is classic tech sector speak – and which borrows heavily from Microsoft versus the DoJ. That defence is that its actions did not hurt but in fact helped innovation. Tech companies like to counter that they have improved the computer experience for ordinary end users while creating opportunity for partners.

Like Microsoft, Apple will discover that "innovation" is a weak and subjective basis for defence and one the Feds aren't interested in attacking too hard.

The reason is because the crux of the case is antitrust under the Sharman Act, and whether Apple held a dominant position that it abused, hurting customers, competitors and - thus - the market. Under US law, it is not illegal to be a monopoly. The problem comes if a monopolist tries to consolidate its position using, say, price-fixing or threats.

Integration versus bundling

The market-share stats are in the government’s favour. While Apple’s share of the ebooks market is smaller than that of Amazon, its reader device – the iPad – is dominant. Admittedly, the iPad is a multi-function unit while Amazon’s Kindle does just one thing. Apple has 54 per cent of the tablet market compared to 16 per cent for the Kindle Fire.

In the 1990s and 2000s, Microsoft became the number-one supplier of desktop operating systems with Windows on PCs. Once it had entrenched its position, Microsoft then tried to spin up a successful browser business and sink Netscape by telling PC-makers they couldn't get Windows unless they accepted IE too.

Sure, Microsoft could argue innovation through integration of Windows and IE, but Microsoft was sunk when emails emerged showing how PC-makers like Gateway had been bullied into accepting IE or risking getting cut off by the software giant. The wriggling of Microsoft’s execs under oath over why and how far they’d integrated IE with Windows further helped undermine Microsoft's case.

When it comes to Apple, the DoJ could argue Apple has followed Microsoft by claiming innovation through integration when it actually what it was doing was using "bundling" to uphold its dominant market position.

Buy a book from Apple’s iBookstore and you are stuck on an Apple iDevice. Publish a book using the iBooks Author software and the book remains equally stuck – unless you export to PDF. Apple might argue iPads make the books beautiful with integrated sale and download and liquid page turns, but government lawyers aren't known for their appreciation of such finesse.

Monopolist Amazon, it might be argued, is the one whose technology changes have helped the market: its reader software works on different manufacturers' devices – Windows, Mac, iPad and iPhone, Android and Windows Phone.

And this is where it will start to get really tricky for Apple.

Amazon might be the number-one provider of ebooks, and you might not like that because it's got a mental and transactional choke point on the internet, but Amazon has had a commoditising effect that has helped shoppers. Often you'll find goods of all kinds for sale that are cheaper on Amazon than on other stores. In many ways, Amazon has become like the Wal-Mart of the web, by forcing down prices and giving merchants a huge addressable market.

The same cannot be said for Apple, a company with a track record of building expensive hardware, delivering closed systems, and of signing a deal that favour suppliers and hurt consumers and the competition by pushing up prices.

To win, of course, the DoJ will need to prove collusion actually occurred – that talks and meetings were held and agreements signed. The DoJ filing here certainly lists emails, meetings and 56 phone calls between Apple and the book publishers mentioned on the Agency Agreement. There’s even mention of a letter from Apple CEO Steve Jobs to one publishing executive telling him if he didn’t sign the Apple Agency Agreement he had two choices: keep paying $9.99 to Amazon or “continue with a losing policy of delaying the release of electronic versions of new titles".

The DoJ will need to produce actual words on paper or email or sworn statements – as it did against Microsoft – otherwise its case is circumstantial. In the based-on-a-true-story flick on lysine price-fixing – The Informant! – James Epstein, lawyer to Matt Damon's whistleblower, says: “Four white guys in suits getting together in the middle of the day - that's not a business meeting, that's a crime scene." Without hard proof on the DoJ's part, it is just a business meeting, not a crime scene.

Saved by the Bells

Strangely, it might be that the economics of the market – or politics – will save the day for Apple.

As far as politics goes, we should remember that the DoJ is headed by people appointed by politicians elected to the White House. So, while Microsoft was prosecuted under a Democrat president and attorney general, it was the Republican Party of George W Bush and Richard Ashcroft that oversaw the settlement. They wanted a settlement reached quickly, and it was: in November 2001, one year after the Republicans took power.

The US is now in another election year, with Americans going to the polls in November. Barack Obama’s approval numbers are slipping and should the Republican party succeed – possibly under the leadership of Mitt Romney, who claims to be “business-friendly” – then priorities will certainly change once more.

When it comes to economics, whether or not Apple wins in the courtroom will prove irrelevant for the future of ebooks and readers. AT&T was broken up, but the Bells reformed to re-constitute and compose two of America's largest fixed and wireless phone and internet service providers: AT&T and Verizon. With no tablet competitor to the iPad on the horizon, it may be Apple continues to cream the tablet-as-ebooks niche but just not make quite as much money as it would like.

In this scenario, it will matter more to Apple as a matter of honour whether, like Microsoft, it wants to go down in history as a convicted monopolist.

Ultimately, the entire case is likely to become a futile exercise in government trying to shape the market through legal intervention. As surely as the Bells reconstituted and as Microsoft's IE domination was eroded by the unexpected rise of Firefox and then Google's Chrome, Apple’s ebooks monopoly could also be undermined by the some unexpected factor. ®